Mortgage Choice Limited, Macquarie Group Ltd and Xero among service sector winners

With hopes that business gains in the service sector will help make up for the weakness in mining, the top service sector areas, finance, health and community services are expanding the most right now and taking the lead.

The Australian Industry Group’s Performance of Services Index (PSI) for January showed these sub-sectors were the big gainers, with the top spot going to finance and insurance. According to the release, it has been on the rise since October last year and is likely the result of stronger transaction levels for property and other assets.

This indication matches up with the rise in the housing market and the general recovery of financial markets both domestically and overseas.

Mortgage Choice Limited (ASX: MOC), the mortgage broking company, had a great run in share price since July 2012, up from about $1.30 to $2.93 now. Interest rates, at their lowest levels in decades, are spurring on property sales.

Higher property sales volumes at increasing prices also mean more potential profit for Macquarie Group Ltd (ASX: MQG). Apart from its investment banking business, it wants to expand into the residential mortgage business in a big way and has a strategic partnership with Yellow Brick Road Holdings Ltd (ASX: YBR), the mortgage broking and financial planning company founded by entrepreneur Mark Bouris.

The bank can tap into Yellow Brick Road’s extensive branch network and offer its loan products to property purchasers and owners nationwide.

Taking the market by storm, the online accounting and business services provider XERO FPO NZ (ASX: XRO) is moving into the financial services sector quickly with its browser-based software platform. Only listing in November 2012, shares are up a phenomenal seven times over, from about $5 to $35.33.

It announced an 84% rise in operating revenue for the six months ended 30 September 2013, but a net loss after tax of $17.1 million hasn’t taken the wind out of its sails. It is planning expansion into the much larger US financial services market and investment for that is getting priority.

It did have a cash balance of $55.3 million at the end of that period, well up from its $30.6 million in the prior corresponding period. Shareholders are game for the ride it seems, although the share price has pulled back from its $41.00 all-time high in late January.

Foolish takeaway

The initial upturns in both the property and share markets are roughly coming together. We may see a pullback in the US and domestic stock exchanges, but that would probably be a healthy event after a prolonged run up.

Value investors shouldn’t fear market reactions downward, but see them as buying opportunities to pick up their favourite stocks at reduced prices.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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